Fortinet Plunges 13%: Bulls Troubled by CFO ‘Setback’

By Tiernan Ray

Shares of enterprise security vendor Fortinet (FTNT) closed down $2.54, or almost 13%, at $17.10, after the company announced Wednesday after the close that its CFO, Ahmed Rubaie, will step down for personal reasons, being replaced on an interim basis by the company’s controller, Nancy Bush, while Fortinet seeks a permanent replacement. CEO Ken Xie thanks Rubaie for his service.

Bulls on the stock were rather unsettled today about this, the second CFO departure in a year, since Ken Goldman left at the end of 2012 to become CFO of Yahoo! (YHOO). Rubaie’s departure is complicated by the fact that he had the COO title as well. The company said it is also searching for ” a senior operations executive,” although some on the Street note that Xie had already taken the title of president of the company.

Bulls today seem mildly shook up by the announcement, although several re-affirmed their faith in the company’s products and market opportunity.

Raymond James‘s Michael Turits, reiterating an Outperform rating, writes that “We do not believe his departure owes to accounting or financial concerns regarding the company,” but it is still a negative:

The once again vacant CFO slot is a negative for FTNT, with investors hesitant to get behind the story during the last CFO absence and the sudden-ness of this departure after such a short tenure highly unusual. Rubaie was well liked by the Street from his prior stint at Ariba and was seen as a strong hire for Fortinet. The level of concern regarding the CFO vacancy will be higher than during the previous transition given the unusual circumstances. While disturbing, we remain positive of Fortinet’s business momentum and opportunity for growth in its core SMB and carrier markets, and newer opportunities in the high-end enterprise data center. We continue to view 2014 as both an overall cyclical opportunity for security spending with an improving IT and overall macro outlook and more specifically regarding an enterprise and datacenter firewall refresh cycle and upgrade cycle to “next gen” firewalls.

FBR Capital Markets‘s Daniel Ives reiterates an Outperform rating, echoes Turits’s remarks, writing “Mr. Rubaie was thought to be a key ingredient in the company’s recipe for success over the next few years” and had an “immediate impact” in that he “gave investors incremental confidence in the Fortinet story heading into 2014.”

But, he maintains faith in the company’s products:

Fortinet will now go “back to square one” in its CFO search as Nancy Bush will yet again take over the interim role until a permanent replacement is found. That said, fundamentally speaking we believe Fortinet is in a much better place today than it was back in April as inventory issues have been resolved, channel execution has significantly improved (two good quarters in a row), and it appears the product cycle is starting to kick in and thus translate to accelerated bookings growth for 2014. In the press release Fortinet also indicated that the company is tracking to its guidance so far in the quarter, although we note the majority of sales usually come in the last few weeks of a given quarter. In a nutshell, despite the head scratching CFO departure that Fortinet announced in an “interestingly timed” pre-Thanksgiving press release, we remain positive on the overall story heading into 2014 as we find the risk/reward compelling on the heels of strong secular growth, a healthy product cycle, and attractive valuation.

William Blair‘s Jonathan Ho reiterates an Outperform rating, writing he’s “disappointed,” but that his conversations with management subsequent to the announcement suggest Rubaie’s departure is “not related to financial reporting disputes.” Ho is a bit more concerned now:

While the company indicated that it was on track to meet current quarter guidance, we believe Fortinet still has room to improve execution and consistency. We believe the company has corrected inventory execution issues and continues to execute against its plan to improve sales execution. While there is no immediate impact to the company’s fundamentals, we believe the stock could react negatively to the departure and relatively brief tenure of the CFO and we are incrementally more concerned over the company’s ability to sustain growth longer term without a more consistent presence at the chief operating officer and chief financial officer levels.

And Aaron Schwartz with Jefferies & Co. reiterates a Buy rating, and a $25 price target, writing that “The appointment of Mr. Rubaie to the CFO/COO roles was a reason for our July ’13 upgrade and the change is a setback.”

A part of our July ’13 upgrade to a Buy was based on our expectation for operational discipline, better sales consistency in addition to an improvement in investor communication which we believe had been lacking at the company. Ultimately, stock performance will be based on the company’s ability to accelerate growth and cash flow generation—which we expect in CY14. But given the lack of institutional support despite better than expected financial results over the last two quarters, the change at the CFO and COO level is a setback and could further diminish support for the stock (not to mention the poor timing of the disclosure in a dual holiday period and five days after Mr. Rubaie resigned; although we understand the timing was also tied to SEC /legal review).

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.